US securities regulators are set to crack down on the use of derivatives in certain funds sold to the public by asset management firms, the Wall Street Journal reported.
The Securities and Exchange Commission (SEC) will propose rules that will aim to limit the risks involved in leveraged exchange-traded funds, according to the report.
Regulators believe the products can be highly volatile and expose investors to sudden, outsize losses.
At issue is the growing use by some ETFs of derivatives, contracts that permit investors to speculate on underlying assets and to amplify the potential gains through leverage, or borrowed money, the report said.
SEC officials have said the increasing use of derivatives by mutual funds to boost leverage warrants heightened scrutiny, and that the agency’s existing investor protection rules haven’t kept pace with industry practices.
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